- More strict fiduciary standards. The DOL’s proposed rule is expected to curtail the types of investments and investment advice currently available to plans and participants.
- A limiting effect. If any of the factors used under ERISA to determine fiduciary status are changed, it could cause employers to provide less financial information though their plans.
- Employer action items. Initial steps for employers include identifying those within the organization and among service providers who interact with plan participants and the extent of that interaction.
Employers and service providers may face a higher financial standard – that of a fiduciary – when giving financial information to employees, under a proposed rule from the Department of Labor (DOL).
The rule, dubbed the “Retirement Security Rule: Definition of an Investment Advice Fiduciary,” is being published this week in the Federal Register. The comment period will close Jan. 2, 2024, and the final rule is expected in place by May 2024.
Proponents believe the new fiduciary standards will protect retirement plan participants, but critics – including some lawmakers and industry groups that represent retirement plan sponsors and financial professionals – say the rules will reduce the amount of financial information offered to employees.
If that is indeed the result, it could have a significant impact on employees, many of whom want employers to help them manage their financial stress, according to a recent PWC survey.
How it Affects Employers
The proposed rule is expected to curtail the types of investments and investment advice currently available to plans and participants, said Carol McClarnon, a partner at the Eversheds Sutherland law firm.
She added that the preamble to the proposed rule suggests there can be fiduciary advice whether or not the recipient understands or knows it is fiduciary advice -- which completely detaches the word “fiduciary” from its commonly understood meaning.
Lynn Dudley, senior vice president, global retirement & compensation policy, at the American Benefits Council (ABC), concurred that the new rule would substantially change the factors by which the term fiduciary is defined. She also stressed that the current law’s five-factor test does not need to be amended.
“If any of the factors are changed, say, to eliminate the ‘regular’ ‘mutual understanding’ or ‘primary basis’ requirements,” employers may feel compelled to offer less financial help in their plans, she said, “because fewer people will be able to talk to participants about the plan’s investments or distributions without being treated as a fiduciary.”
Dudley noted that under the proposed rules, even simple interactions could be subject to a fiduciary standard of care. Such interactions could include when a provider’s representative tells an employee about available plan investment choices or helps a small business owner select investments for the plan.
Further, under the proposed rule, employers would be offering fiduciary advice when they recommend a financial professional, said McClarnon. This provision, which was first offered in 2016, poses the same problem it did then: Employers will hesitate to give participants leads for retirement investment providers if doing so will be evaluated under a strict “fiduciary standard” of care.
McClarnon sees at least two other potential outcomes from the proposed rules:
- Amending existing prohibited transaction exemptions commonly used by financial services providers.
- Amending the regulatory definition of “fiduciary” to reflect DOL’s view that advice to rollover retirement assets to an IRAs would be considered fiduciary investment advice.
“Employers should pay attention to how the proposal modifies the fiduciary nature of rollover investment advice,” she said. “There may be a need to review and revise existing service agreements with record keepers and plan investment providers.”
She added that the rule’s compliance burden ultimately could increase the costs of plan and investment administration.
Employer Action Items
Initial steps for employers include identifying those within the organization and among service providers who interact with participants and the extent and nature of those interactions. “They will need to be monitored, and such interactions may need to be materially limited,” said Dudley.
Organizations should proceed cautiously with retirement benefits activities and should work with legal counsel to review policies and plans, she said.
“Plan sponsors will need to know how the new rule will affect what they can deliver to our participants in a practical way,” Dudley said. The potential risks could be substantial. “Employee benefits has become more litigious, with plaintiffs bringing more class-action lawsuits,” she said, “so it is an area that legal counsel needs to be engaged in actively.”
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